Should you Invest in Capital Gain Bonds to Save Taxes?

Should you Invest in Capital Gains Bond to Save Taxes?

Should you Invest in Capital Gains Bond to Save Taxes?

We love to Save taxes and one of the ways to save on Long term Capital Gains Tax on Real Estate is to invest in Capital Gains Tax Saving Bonds from NHAI or REC.

Below are few rules to avail this tax exemption:

1. Only Long Term capital gains from Real Estate are eligible to be invested in these bonds

2. You can invest capital gains up to Rs 50 lakhs in these bonds

3. These bonds give interest of 5.25% and have maturity tenure of 3 years

4. The tax exemption is covered under section 54EC of Income tax

5. The interest earned on the bonds are taxed according to your marginal income tax slab

Download: Excel based Capital Gains Calculator for Property

Economic Times today (February 27, 2017) published an article “Tax Savings That Do not Actually Help Save Much” by Dhirendra Kumar who is CEO, Value Research which recommends you should not invest in Capital Gains bond to save tax. Here is a snapshot:

Tax Savings That Do not Actually Help Save Much - Snippet

Tax Savings That Do not Actually Help Save Much – Snippet

Do you think this is right logic?

Also Read: How are your Investments Taxed?

Capital Gain Bonds – Should You Invest?

We did our calculation and here it is.

Assumptions:

Amit has Long Term Capital Gains on sale of Property of Rs 50 Lakhs and he has two options

  1. Invest in Tax Saving Bond and Capital Gains OR
  2. Pay Capital Gains tax and invest the rest

The table below covers both the scenarios

Invest in Capital Gains Tax Saving Bond to Save Taxes

Invest in Capital Gains Tax Saving Bond to Save Taxes

As you can see with people in highest tax bracket of 30%, need to make at least 12% after tax returns to get what they would get after saving capital gains though capital gains bonds! This number would be higher for people in lower tax brackets!

I think it’s difficult to earn 12% post tax returns in 3 years for most and hence capital gains saving bonds make complete sense to save capital gains tax.

Also Read: Wrong Maths to Fool Investors (A wrong calculation published in Economic Times earlier & my counter)

To Conclude:

I published this post just to bring to your attention that NOT everything you read in Newspapers or Blogs (including apnaplan.com) may be correctKeep in mind it’s your hard earned money and hence check and double check before you make any investment decision!

6 thoughts on “Should you Invest in Capital Gain Bonds to Save Taxes?

  1. Dear Amit, Thanks for good info. I want to purchase 50K bonds from REC. Where should I purchase? Whom should I contact?

  2. I read Mr. Kumar’s article at his website Value Research. The very first thing I noticed was a lack of maths to prove his point, combined with the fact that he mentioned the ROI as 6%. I said as much in a comment on his article.

    So I am glad you actually used mathematics to prove your point. When it comes to money, I am surprised that in this day and age, experts can still get away with publishing sweeping statements with no math to back up their claim.

  3. Hi Amit

    I also read this article in the newspaper and was surprised to note that the article in the newspaper was not well researched. They even mentioned that Interest on Cap Gain Bonds is 6% whereas it is 5.25%.

    Anyways, you have now clarified everything and also mentioned that in case the taxpayer pays Capital Gains tax, he should earn a minimum of 12% return to be at par.

    Very good analysis sir…

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